Working papers from the Federal Reserve Bank of Dallas are preliminary drafts circulated for professional comment.

2005 | 2004 | 2003 | 2002 | 2001 | 1999

2004 Working Papers

0504
Argentina's Capital Gap Puzzle [PDF]
Finn E. Kydland and Carlos E. J. M. Zarazaga

0404
The Implications of Capital-Skill Complementarity in Economies with Large Informal Sectors [PDF]
Pedro Amaral and Erwan Quintin

In most developing nations, formal workers tend to be more experienced, more educated, and earn more than informal workers. These facts are often interpreted as evidence that low-skill workers face barriers to entry into the formal sector. Yet, there exists little direct evidence that such barriers are important. This paper describes a model where significant differences arise between formal and informal workers even though labor markets are perfectly competitive. In equilibrium, the informal sector emphasizes low-skill work because informal managers have access to less outside financing, and choose to substitute low-skill labor for physical capital.

0304
Why do Financial Systems Differ? History Matters [PDF]
Cyril Monnet and Erwan Quintin

We describe a dynamic model of financial intermediation in which fundamental characteristics of the economy imply a unique equilibrium path of bank and financial market lending. Yet we also show that economies whose fundamental characteristics have converged may continue to have very different financial structures. Because setting up financial markets is costly in our model, economies that emphasize financial market lending are more likely to continue doing so in the future, all else equal.

0204
Currency Competition and Inflation Convergence [PDF]
William C. Gruben and Darryl McLeod

All agree partial dollarization or currency substitution is a legacy of past inflation and exchange rate instability. Some argue partial dollarization contributes to exchange rate instability. However, if Central Banks respond to dollarization by lowering money growth and maximizing seigniorage revenue, inflation falls and converges on dollar inflation rates. We present a simple model of currency competition with open capital markets to illustrate these points. Empirical tests for Latin America and about twenty other countries suggest that dollarization is both a legacy of past inflation and a constraint on future inflation. Dollarization may complicate monetary policy and prudential regulation, but one silver lining is that currency competition appears to have accelerated the sharp fall in and convergence of Latin inflation rates over the past decade.

0104
Making Finance Matter [PDF]
Pedro S. Amaral and Erwan Quintin

We present a model in which the importance of financial intermediation for development can be measured. We generate financial differences by varying the degree to which contracts can be enforced. Economies where enforcement is poor employ less capital and less efficient technologies. Yet, accounting for all the observed dispersion output requires a higher capital share or a lower elasticity of substitution between capital and labor than usually assumed. We find that the effects of changes in those technological parameters on output are markedly larger when financial frictions are present. Finance, that is, matters.